Fitch Ratings said Monday it would maintain a stable rating outlook for US equity REITs in 2017, thanks in part to the consistency with which the sector has adopted and maintained credit-friendly financial policies. Other factors weighing in REITs' favor include expectations for good property fundamentals, consistent leverage profiles and access to attractively priced equity and unsecured bond capital. Furthermore, the ratings agency sees "better portfolio strategies and management, less risky external growth strategies and generally more conservative financial policies" underpinning a positive outlook for the sector.
From the standpoint of fundamentals, Fitch says it expects multifamily to lead the way once more, although same-store NOI growth will be below 2016 levels, and some markets are likely to post negative results. Most retail, industrial and office REITs should have positive SSNOI growth next year, says Fitch.
"Companies are increasingly focusing on (re)development to drive earnings in the context of a competitive acquisition market, lower leverage and modest organic growth," according to Fitch's equity REIT outlook report. Good property fundamentals may cause some companies to moderately increase their appetites for speculative development, particularly industrial REITs." Such later-cycle development, in Fitch's view, poses "execution and funding risks."
Fitch anticipates that issuers will retain access to low all-in-cost secured and unsecured debt, despite expectations of increasing short-term interest rates—starting, most likely, with a move by the Federal Reserve later this month. The ratings agency notes that the property transaction market remains "robust," thereby enabling companies to fund leverage-neutral growth initiatives and improve portfolio quality via asset sales.
US REIT leverage isn't expected to change meaningfully next year, according to Fitch. "Proceeds from dispositions will be redeployed toward acquisitions, development or modest share repurchases, and equity issuance will be episodic," the report states. "Any deleveraging will be organic as companies grow recurring operating EBITDA and retain cash flow."
